From Texas, I mostly cover the energy industry and the tycoons who control it. I joined Forbes in 1999 and moved from New York to Houston in 2004. The subjects of my Forbes cover stories have included T. Boone Pickens, Harold Hamm, Aubrey McClendon, Michael Dell, Ross Perot, Exxon, Chevron, Saudi Aramco and more. Follow me on twitter @chrishelman.

4/18/2012 @ 10:38AM41,535 views

Two Years After The Spill, BP Has A Secret: It's Booming

But these are minor compared with BP’s problems in Russia. In early 2011 BP announced a sweeping deal with Kremlin-controlled Rosneft that involved a $16 billion share swap and a partnership on exploratory drilling in the icy Kara Sea. At the time Dudley said the deal was “critical to BP’s future.” But the oligarchs that control the TNK side of TNK-BP (billionaires Mikhail Fridman, German Khan, Victor Vekselberg and Len Blavatnik) balked at the deal, insisting that any Russian ventures had to go through them. To remove the conflict BP tried to buy out the oligarchs’ half of TNK-BP, offering $32 billion. They wanted more like $40 billion. The two sides are now engulfed in arbitration after a legal fight that led to more raids of BP’s Russian offices.

As the deal collapsed, Exxon Mobil embarrassed BP by swooping in to fill BP’s shoes with Rosneft. It was a sweet moment for Exxon Chief Rex Tillerson, who in early 2011 took issue with Dudley’s assertion that the Macondo spill could have happened to any ­operator. “I do not agree that this is an industrywide problem,” said Tillerson at the time.

The comment stung, especially since Dudley has made a big deal about forging an overhaul of BP’s safety culture. Under empire-building chief executive John Browne and his acolyte, Hayward, BP was a decentralized giant with regional divisions largely competing against each other for cap-ex dollars and bragging rights. After the 2005 explosion at BP’s Texas City a commission led by former Treasury secretary James Baker determined that BP had done a better job ensuring occupational safety (like banning cellphones while driving and forcing people to hold the railing on stairs) while falling short on critical process safety (maintenance, designing safe systems and learning from accidents).

Dudley has sought to create what he has called a “standardization of process and consistency of implementation.” He created a new safety division whose director, Mark Bly, reports directly to Dud­ley. Bly oversees hundreds of specialists who have the authority to stop any operation at any time. And they have. In Trinidad BP took a rig out of service when it determined it didn’t have a good enough blowout preventer (BOP). In Egypt BP sent away a rig for an overhaul of BOP controls. In Alaska it temporarily shut down two rigs. Elsewhere it shut production on a platform to repair water pumps and shut another field to work on a pipeline. They’ve run maintenance programs at 48 sites worldwide.

Today all of BP’s wells are drilled by a single Global Wells Organization. New standards ensure that BP will only drill from a floating rig if it has a BOP with two sets of blind shear rams and a casing shear ram—to slice and seal the pipe. Such redundancies would have stopped the Macondo blowout as soon as it began. And to remove any potential conflict from within the company, BP now uses third-party inspectors to verify that these BOPs will work.

But don’t believe for a second that Big Oil has learned enough from BP’s blowout to ensure spills won’t happen again. In the past year we’ve seen ConocoPhillips leak 700 barrels into China’s Bohai Bay and Chevron a couple thousand barrels of oil-tainted drilling mud off Brazil. As I write this, Total is fighting a natural gas blowout in the North Sea and may need months to drill a relief well. None of these is even in the same league, let alone the same ballpark, as BP’s blowout, yet Conoco has agreed to pay more than $100 million in damages while Chevron has been threatened with fines of more than $10 billion. As Dudley said in a December 2011 speech, “Exploring for oil and gas has always been difficult, expensive and full of risk.”

“We fuel rising living standards,” Dudley said. “So refusing to explore is not an option. That would condemn humanity to a future of shortages, poverty and conflict.”

That risk of future shortages is a good reason to invest in oil, but what are investors to think about BP in particular? Deutsche Bank analysts figure BP is trading at a 29% discount to net asset value. Investors buying BP are getting proven oil and gas reserves at the equivalent of $11 a barrel, compared with $19 a barrel when buying Royal Dutch Shell. BP trades at around five times earnings versus seven for Shell and ten for Exxon Mobil. JPMorgan analysts say that to justify its low valuation BP would need to get hit with $20 billion more in fines and penalties, to bring the total Macondo bill to $50 billion.

A hit that big could only come were a court to find that BP was grossly negligent in causing the spill (i.e., the company willfully neglected the use of reasonable care required to avoid grave injury). A gross negligence finding would enable the feds to levy fines of up to $4,300 per barrel spilled, or upwards of $17 billion. Otherwise the maximum is just $1,100 per barrel.

Dudley naturally thinks a finding of gross negligence is unlikely. In October 2010, in his first speech as CEO (given to the annual conference of the Confederation of British Industry), Dudley insisted that “no single factor caused the tragedy and that the well design itself, despite what you have heard, does not appear to have contributed to the accident.” The primary causes, according to BP: First, the cement at the bottom of the well was faulty and did not seal off the flow of hydrocarbons. Second, a well pressure test was misinterpreted. Third, the blowout preventer sitting on the seafloor didn’t work right—the shear rams did not close and stop the blowout. Fourth: Transocean workers failed to monitor and control the well. No mention of BP’s questionable ­engineering or cut corners.

As such, BP has just $3.5 billion reserved on its books to pay federal fines under the Clean Water Act. BP’s assumption is that it will be able to negotiate lenience from prosecutors for its vigorous cleanup response, its eagerness to set aside $20 billion to pay claims and its efforts to clean up its act.

We’ll see. Maybe Dudley will get lucky. Yet as oil prices rise, so does the public’s thirst for cash and the spectacle of seeing BP execs taken on perp walks. “Nobody went to prison for BP’s Texas City explosion,” says a Houston attorney involved in Deepwater Horizon litigation. “So the government may be taking a harder look at indictments in this incident.” The likeliest targets: Donald Vidrine and Robert Kaluza, the two highest-ranking BP men on board at the time of the explosion. Dudley wants to avoid a criminal trial as much as he did the civil trial. Before the February deal with plaintiffs Dudley declared, “As I’ve said before, we’re ready to settle if we can do so on fair and ­reasonable terms. But we are preparing vigorously for trial.”

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Precisely! There may not be visible oil left floating about, but the damage has certainly been done. I hope they call out your link, because the horrific things they are pulling from the ocean cannot be ignored.

“Van Heerden is controversial in Louisiana, so I should mention that this isn’t the first time he and Kemp have helped convince me that the conventional wisdom about a big story was wrong. Shortly after Hurricane Katrina, when the Army Corps of Engineers was still insisting that a gigantic surge had overwhelmed its levees, they gave me a tour that debunked the prevailing narrative, demonstrating that most of the breached flood walls in New Orleans showed no signs of overtopping. Eventually, the Corps admitted that van Heerden and Kemp were right, that the surge in New Orleans was not so gigantic and that engineering failures had indeed drowned the city.”

come on kelly, the oil spill is not the biggest man made disaster of all time. there’s hundreds or thousands of events that killed more people and caused more environmental and social damage. nuclear bombs in japan. the bhophal chemical spill. 9-11. the rwandan genocide. agent orange. the fire bombing of dresden.

don’t forget that every single day the world burns 86 million barrels worth of crude oil and sends the pollution up into the air. that’s 20 times more than the oil that was spilled into the gulf. either way it’s bad pollution, and you don’t want to be in the middle of it, but try to keep some perspective.

Chris that was a nice article. Are you willing to admit that Rush Limbaugh was extremely accurate in his prediction about how the oil spill would turn out?

I am extremely skeptical of the claims of continuing environmental problems. Why aren’t the environmentalists demanding cameras under the water of there is oil sitting down there as they claim? Ironic isn’t it?

@kelly bergeron

yeah I have to go to lunch but I’ll back to shred your spin article, don’t worry.

Of the Big 4 (BP, CVX, COP and XOM) BP sells at the lowest price/sales ratio, the lowest price/earnings ratio, has the second lowest profit margins (slightly ahead of COP) and has the lowest operating margins.

Obviously “Wall Street” could very well be wrong, but BP isn’t exactly prospering right now.

Sorry Chris, I don’t share your awe and admiration for the folks at BP.

Making huge profits, while trying to elude responsibility and liability for egregious environmental destruction and human health and economic destruction is not a virtue.

So they are acting convincingly contrite and humble? All the while trying to shift blame to the victims of their cost cutting safety violations and reckless persuit of profits? Even portraying themselves as saintly benefactors to pay for the damages caused by THEIR actions. And hiring an army of lawyers and PR people with bottomless wallets—-to create an image of themselves as heros and portray the victims of their negligence and and even criminal wrong-doing as the shiftless, lazy, greedy beggars.

All this when we have the means to be rid of BP and their product? Biofuels do not harm the environment. Biofuels do not harm people. Biofuels can do anything that can be done with oil. And biofuels can be made over and over again and again using the same resources.

If BP is really serious about being open, fair, honest, and concerned about people, the environment and producing profits in a manner that beneits everyone instead of out of pure greed and manipulation——then let them be an energy company that produces biofuels. Let them be leaders in cleaning up the environment, building a strong economy, and caring for people and their health………………………………………..instead of milking profits from destruction and evasion of responsibility.

Talk is cheap—-even if you spend over $400 million slapping people in the face with lies. I prefer to believe what they do. So far, I don’t see them doing anything except business as usual—anything to make a buck at our expense.

I’ll believe that BP is worthy of praise and respect when I see them DO something that is worthy of praise and respect.

Want to convince ME that they are doing something worthwhile? Well, for one thing—–let them start producing ethanol and selling E85 at every single one of their BP and ARCO stations.

fred, they’re not trying to hide the fact that their spill caused lots of destruction. that’s why they spent $14 billion on the cleanup and $8 billion on claims and $8 billion more on a settlement with plaintiffs. that kind of money can repair a lot of destruction.

It works for Brazil. And Petrobras is a leader in environmental protection AND biofuel production. It is also close to becoming the largest energy company in the world—-as reported right here in Forbes.